Smart Move?
EARLIER THIS SUMMER, Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins Act—GENIUS, for short. This sounds obscure, but it’s a story worth following. The GENIUS Act’s purpose is to promote the growth of—and to regulate—a new type of financial instrument known as a stablecoin.
What’s a stablecoin? It’s similar to a cryptocurrency but differs in one important way: Bitcoin and other cryptocurrencies have exhibited wide price swings. That makes them interesting to investors but less-than-useful as currencies for everyday transactions. Just ask Laszlo Hanyecz, an early adopter of bitcoin.
Back in 2010, Hanyecz paid for a Papa Johns pizza order with 10,000 bitcoin. At the time, this translated to about $40, an appropriate price. But today, those same 10,000 bitcoin would be worth more than $1 billion. That’s why the term “cryptocurrency” has become somewhat of a misnomer. Even in the past 12 months, bitcoin has nearly doubled in value. It’s also experienced steep declines. In 2022, it lost more than 60%. This volatility makes bitcoin and other cryptocurrencies impractical as currencies.
Stablecoins intend to solve that problem. To be useful as currencies, they promise to maintain a perfect 1-to-1 exchange rate with the U.S. dollar. But that raises a question: If stablecoins never deviate from a fixed price of one dollar, what purpose do they serve? Why not simply hold dollars in the bank?
Stablecoins turn out to have potentially broad appeal.
For consumers, the pitch is that stablecoins offer a better way to transfer funds than any other existing method. Credit and debit cards, for example, are ubiquitous, but they aren’t practical for payments between individuals.
PayPal, Venmo and Zelle allow for person-to-person payments, but they too have limitations: They require some setup, and they cap the size of transactions, making them infeasible for things as basic as rent payments.
Wire transfers are quick, but they’re cumbersome, and many banks charge fees to send—and sometimes even to receive—wires, making them impractical for day-to-day use. Most people use wire transfers infrequently, if ever.
While it can be cumbersome to transfer funds within the U.S., it’s even more costly and complicated to send funds internationally. Services like Xoom (owned by PayPal) have made this easier, but these services carry fees, and also charge a “spread” on the currency conversion. By contrast, stablecoins would have no fees and no conversion costs.
Because stablecoins aren’t encumbered by any of those limitations, they represent a potentially promising alternative for consumers.
The government is also interested in stablecoins. The reason is interesting. A White House press release notes that “the GENIUS Act requires 100% reserve backing with liquid assets like U.S. dollars or short-term Treasuries,” then adds: “By driving demand for U.S. Treasuries, stablecoins will play a crucial role in ensuring the continued global dominance of the U.S. dollar as the world’s reserve currency.”
That’s stablecoins’ primary appeal to the government’s. Because stablecoins need to be backed on a one-for-one basis by either U.S. dollars or U.S. Treasury securities, stablecoins have the potential to generate new global demand for U.S. currency. And proponents argue that stablecoins have the potential to turn the dollar into a currency that can be used in everyday transactions worldwide. While this vision may sound like a stretch, it need not be all-or-nothing. If the GENIUS Act can increase demand for Treasury bills or extend the reach of the dollar by any amount, that would be positive for the U.S. economy.
A third constituency that’s very interested in stablecoins: retailers. For businesses that accept credit cards, processing fees average about 2%. For years, retailers have battled with Visa and MasterCard, which are responsible for setting these rates, but without much luck. It’s no secret how profitable the credit card business is. Visa’s gross profit margin is about 98%, and its net margin (after all expenses and taxes) averages about 53%. By way of comparison, Microsoft—itself an extremely profitable company—has net margins in the neighborhood of 35%.
For this reason, there’s speculation that large retailers, including Amazon and Walmart, will accept stablecoins and might even issue their own coins. Shopify, a company that provides back-end shopping cart tools for millions of ecommerce sites, already allows retailers on its platform to begin accepting one type of stablecoin.
Part of the motivation for the GENIUS Act is that stablecoins don’t have an unblemished history. Most notably, in 2022, a coin called TerraUSD, which was supposed to be pegged to the dollar, crashed disastrously, losing most of its value. The new rules, which require that each stablecoin have a dollar of collateral, should help consumers avoid this outcome. Terra failed because it didn’t have that collateral.
Should you try stablecoins? The good news is that there’s no rush. Since stablecoins are intended to maintain a fixed value, there’s no risk of missing out on price appreciation. For that reason, consumers can afford to take it slow, and watch and wait to see how things develop.
One reason I’d take it slow is stablecoins may not be entirely without risk. Even though they’re intended to remain pegged to the dollar, that link isn’t guaranteed. Why? Short-term Treasurys, which stablecoins are permitted to hold as collateral, can lose money. Yes, they’re generally very stable but, as we saw in 2022, when interest rates spiked up, these bonds lost about 4%. So there is a scenario in which stablecoins could lose value. That’s why I’d wait for the bugs to be worked out before committing more than a small amount to stablecoins.
That said, I see this new technology as a positive development. Whether it’s stablecoins or something else, advances like this may help put downward pressure on the high fees that continue to be stubbornly embedded in the traditional credit card system.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
What’s a stablecoin? It’s similar to a cryptocurrency but differs in one important way: Bitcoin and other cryptocurrencies have exhibited wide price swings. That makes them interesting to investors but less-than-useful as currencies for everyday transactions. Just ask Laszlo Hanyecz, an early adopter of bitcoin.
Back in 2010, Hanyecz paid for a Papa Johns pizza order with 10,000 bitcoin. At the time, this translated to about $40, an appropriate price. But today, those same 10,000 bitcoin would be worth more than $1 billion. That’s why the term “cryptocurrency” has become somewhat of a misnomer. Even in the past 12 months, bitcoin has nearly doubled in value. It’s also experienced steep declines. In 2022, it lost more than 60%. This volatility makes bitcoin and other cryptocurrencies impractical as currencies.
Stablecoins intend to solve that problem. To be useful as currencies, they promise to maintain a perfect 1-to-1 exchange rate with the U.S. dollar. But that raises a question: If stablecoins never deviate from a fixed price of one dollar, what purpose do they serve? Why not simply hold dollars in the bank?
Stablecoins turn out to have potentially broad appeal.
For consumers, the pitch is that stablecoins offer a better way to transfer funds than any other existing method. Credit and debit cards, for example, are ubiquitous, but they aren’t practical for payments between individuals.
PayPal, Venmo and Zelle allow for person-to-person payments, but they too have limitations: They require some setup, and they cap the size of transactions, making them infeasible for things as basic as rent payments.
Wire transfers are quick, but they’re cumbersome, and many banks charge fees to send—and sometimes even to receive—wires, making them impractical for day-to-day use. Most people use wire transfers infrequently, if ever.
While it can be cumbersome to transfer funds within the U.S., it’s even more costly and complicated to send funds internationally. Services like Xoom (owned by PayPal) have made this easier, but these services carry fees, and also charge a “spread” on the currency conversion. By contrast, stablecoins would have no fees and no conversion costs.
Because stablecoins aren’t encumbered by any of those limitations, they represent a potentially promising alternative for consumers.
The government is also interested in stablecoins. The reason is interesting. A White House press release notes that “the GENIUS Act requires 100% reserve backing with liquid assets like U.S. dollars or short-term Treasuries,” then adds: “By driving demand for U.S. Treasuries, stablecoins will play a crucial role in ensuring the continued global dominance of the U.S. dollar as the world’s reserve currency.”
That’s stablecoins’ primary appeal to the government’s. Because stablecoins need to be backed on a one-for-one basis by either U.S. dollars or U.S. Treasury securities, stablecoins have the potential to generate new global demand for U.S. currency. And proponents argue that stablecoins have the potential to turn the dollar into a currency that can be used in everyday transactions worldwide. While this vision may sound like a stretch, it need not be all-or-nothing. If the GENIUS Act can increase demand for Treasury bills or extend the reach of the dollar by any amount, that would be positive for the U.S. economy.
A third constituency that’s very interested in stablecoins: retailers. For businesses that accept credit cards, processing fees average about 2%. For years, retailers have battled with Visa and MasterCard, which are responsible for setting these rates, but without much luck. It’s no secret how profitable the credit card business is. Visa’s gross profit margin is about 98%, and its net margin (after all expenses and taxes) averages about 53%. By way of comparison, Microsoft—itself an extremely profitable company—has net margins in the neighborhood of 35%.
For this reason, there’s speculation that large retailers, including Amazon and Walmart, will accept stablecoins and might even issue their own coins. Shopify, a company that provides back-end shopping cart tools for millions of ecommerce sites, already allows retailers on its platform to begin accepting one type of stablecoin.
Part of the motivation for the GENIUS Act is that stablecoins don’t have an unblemished history. Most notably, in 2022, a coin called TerraUSD, which was supposed to be pegged to the dollar, crashed disastrously, losing most of its value. The new rules, which require that each stablecoin have a dollar of collateral, should help consumers avoid this outcome. Terra failed because it didn’t have that collateral.
Should you try stablecoins? The good news is that there’s no rush. Since stablecoins are intended to maintain a fixed value, there’s no risk of missing out on price appreciation. For that reason, consumers can afford to take it slow, and watch and wait to see how things develop.
One reason I’d take it slow is stablecoins may not be entirely without risk. Even though they’re intended to remain pegged to the dollar, that link isn’t guaranteed. Why? Short-term Treasurys, which stablecoins are permitted to hold as collateral, can lose money. Yes, they’re generally very stable but, as we saw in 2022, when interest rates spiked up, these bonds lost about 4%. So there is a scenario in which stablecoins could lose value. That’s why I’d wait for the bugs to be worked out before committing more than a small amount to stablecoins.
That said, I see this new technology as a positive development. Whether it’s stablecoins or something else, advances like this may help put downward pressure on the high fees that continue to be stubbornly embedded in the traditional credit card system.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.The post Smart Move? appeared first on HumbleDollar.
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